Insights from Fidelity's portfolio managers

AI technology: Big opportunity or just hype?

Ali Khan – January 4, 2019

"No other investment theme in technology holds as much promise, or was as hyped, as artificial intelligence (AI) in 2018, creating both opportunities and potential pitfalls," says Ali Khan, portfolio manager of Fidelity^® Select Software and IT Services Portfolio (FSCSX).

Khan's view is that AI—the ability of machines to perform tasks with human-like intelligence—is a breakthrough that is still in its infancy.

He cites Google Maps, Netflix, and GPS navigation software Waze as examples of consumers interacting with AI.

Over time, Khan expects to see additional applications in the retail, financial services, telecommunications, and health care industries.

However, not all players in AI will succeed, he says, explaining his view that the ones most likely to perform well over time control large quantities of data and also have strong algorithms for analyzing all of that information.

As of October 31, the fund's largest overweighting was Microsoft, which Khan notes has very strong algorithms and is taking market share from Amazon Web Services. Each offers machine-learning services, data services, and analytics.

Another notable fund holding and overweighting is Workday, a provider of human resources software-based services that Khan says has "underappreciated data opportunities."

Learn more about this manager and his fund
Ali Khan manages Fidelity^® Select Software and IT Services Portfolio, which held securities mentioned in this article on October 31, 2018. As of this date, Class A shares of Google parent Alphabet composed 7.89% of fund assets; Class C shares of Alphabet composed 9.23% of fund assets; Microsoft shares composed 21.03% of fund assets; and Workday shares composed 1.04% of fund assets. The fund did not own shares of Netflix or Amazon as of October 31.

Why small may be a big opportunity in tech

Dan Sherwood – December 19, 2018

"Technology companies generally struggle to reach small businesses, but a few have carved out what I think is a great opportunity to serve this market," says Dan Sherwood, portfolio manager of Fidelity^® Select IT Services Portfolio (FBSOX).

More small businesses are embracing e-commerce, marketing and back-end business functions in a much bigger way due to advances in cloud technology and digital distribution channels, according to Sherwood.

Just as important, he adds, software and services companies have figured out how to help smaller customers with well-priced products that still have a solid profit margin.

For example, Sherwood points to Wix.com, a provider of tools that automate website design for the do-it-yourself segment.

Also, Sherwood notes that companies such as GoDaddy are helping small businesses execute digital marketing strategies. For example, GoDaddy offers tools to take the pain out of email marketing, he says.

As of October 31, the fund had notable out-of-benchmark positions in Wix.com and GoDaddy.

Learn more about this manager and his fund
Dan Sherwood manages Fidelity^® Select IT Services Portfolio, which held securities mentioned in this article on October 31, 2018. As of this date, Wix.com composed 1.16% of fund assets, and GoDaddy composed 2.20% of fund assets.

Yes, Virginia, low-priced tech stocks exist

Brian Lempel – December 12, 2018

"Valuations have expanded for the broader information technology sector, but I see pockets of undervalued opportunities among semiconductors, chip equipment, and certain hardware makers," says Brian Lempel, a sector-focused co-portfolio manager of Fidelity^® Balanced Fund (FBALX).

While many tech stocks remain pricey, a few have been trading below 10 times expected 2020 earnings, due to pessimistic outlooks for particular industries, according to Lempel.

As of October 31, the fund was moderately underweighted in the tech sector, but maintained outsized stakes in communications semiconductor maker Qualcomm and chip equipment maker Lam Research.

Similarly, the fund held non-benchmark stakes in ON Semiconductor and Tokyo-based IT components manufacturer MinebeaMitsumi.

While Lempel acknowledges risks to semiconductor, chip equipment, and hardware companies—trade tension between the US and China, for example—in October he added to each position mentioned, due to what he sees as low valuations.

"In my view, the price of each stock reflects a bearish view about the asset class in general—not the business prospects of these companies—providing potential for upside in the intermediate term," Lempel says.

Learn more about this manager and his fund
Brian Lempel is a sector-focused co-portfolio manager of Fidelity^® Balanced Fund, which held securities mentioned in this article on October 31, 2018. As of this date, Qualcomm composed 0.82% of fund assets; Lam Research composed 0.32% of fund assets; ON Semiconductor composed 0.47% of fund assets; MinebeaMitsumi composed 0.17% of fund assets.

Investing in the "next big policy issue"

Tobias Welo – December 5, 2018

"I think US infrastructure could be a very important policy issue for President Donald Trump in the final 2 years of his term, possibly benefiting certain industrial companies," says Tobias Welo, portfolio manager of Fidelity^® Select Industrials Portfolio (FCYIX).

Infrastructure traditionally is a Democratic priority, Welo says. However, it's one Trump promoted as a candidate. Welo notes that Trump has attempted to follow through on many of the policy issues he raised during his campaign.

Should Trump turn his focus to infrastructure spending in late 2018 or early 2019, Welo believes it's an agenda that could gain legislative support, especially given that the Democrats have overtaken the majority in the House following midterm elections.

Even if an infrastructure bill isn't passed, Welo says he maintains a constructive outlook for the construction & engineering segment, partly due to stronger-than-expected economic growth and his optimism for capital spending.

As of October 31, Welo notes, the fund was overweighted in construction & engineering, specifically Fluor and Jacobs Engineering, which provide design and building services across many end markets. He added slightly to each position in October.

Similarly, he believes certain makers of construction machinery and heavy trucks could gain. The fund continues to hold Allison Transmission Holdings, which Welo thinks could benefit from strong Class 8 truck orders and a healthy construction market.

Learn more about this manager and his fund
Tobias Welo manages Fidelity^® Select Industrials Portfolio, which held securities mentioned in this article on October 31, 2018. As of this date, Fluor composed 1.46% of fund assets; Jacobs Engineering composed 2.34% of fund assets; Allison Transmission Holdings composed 1.95% of fund holdings.

Here's why breakthrough drugs are on the rise

Rajiv Kaul – November 27, 2018

"As of the end of the third quarter, I'm invested in a number of biotechs with drug candidates given 'breakthrough therapy' status by the US Food and Drug Administration (FDA)," says Rajiv Kaul, co-portfolio manager of Fidelity^® Select Biotechnology Portfolio (FBIOX). "I think many stand a good chance of improving patient care," he adds.

According to Kaul, the FDA granted breakthrough status to a record 50+ potential drugs in 2017. An additional 14 candidates received the breakthrough therapy label in the first half of 2018, he notes.

Breakthrough status, Kaul explains, is reserved for drugs that seek to treat serious conditions, and ones in which there is clinical evidence to suggest the candidate is potentially a big improvement over therapies already on the market.

Kaul says that the fund's holdings are exclusively focused on stocks that emphasize innovation through investments in research and development (R&D), versus specialty pharmaceuticals that are less R&D-intensive.

Fund holdings as of September 30 with at least one breakthrough drug candidate are Regeneron Pharmaceuticals, Vertex Pharmaceuticals, BioMarin Pharmaceutical, Seattle Genetics, and Tesaro.

"If these companies are successful clinically, I think they could outperform their peers, because they're providing important new treatments for patients with few alternatives," Kaul says.

Learn more about this manager and his fund
Rajiv Kaul, co-portfolio manager of Fidelity^® Select Biotechnology Portfolio, held securities mentioned in this article on September 30, 2018. As of the end of the third quarter, Regeneron Pharmaceticals composed 2.66% of fund assets; Vertex Pharmaceuticals composed 2.54% of fund assets; BioMarin Pharmaceutical composed 1.21% of fund assets; Seattle Genetics composed 0.80% of fund assets; Tesaro composed 0.26% of fund assets.

Think the internet has killed TV? Think again

Sean Gavin – November 20, 2018

"The growth of new media companies Netflix and Amazon.com has beaten down the share prices of some 'old media' stocks, creating attractive investment opportunities in certain traditional media names that have fallen out of favor," says Sean Gavin, portfolio manager of Fidelity^® Blue Chip Value Fund (FBCVX).

Many of the traditional mass media companies face challenges from new competitors, but only a few big publicly traded names are in a state of perpetual decline, says Gavin.

"Moreover, Netflix and Amazon are still a tiny portion of the overall media market, despite their rapid growth," he says.

Gavin believes the claim that no one watches TV any longer is a myth. To the contrary, he points out, it's still extremely popular among those who watch sports, and an older demographic that watches specific cable content.

Gavin says many "old media" companies with ties to TV still have strong opportunities to monetize a vast subscriber base. In the interim, many are producing strong cash flows.

For this reason, Gavin says, he added to the fund's media holdings overall in the 6 months ending September 30. As of this date, the fund had overweighted positions in both Comcast and Disney.

"In my view, each is a very well-known, traditional media asset that I bought at what I think is a low valuation, mostly because they're out of favor," he says.

Learn more about this manager and his fund
Sean Gavin manages Fidelity^® Blue Chip Value Fund, which held the securities mentioned in this article on September 30, 2018. As of the end of the third quarter, the fund did not own either Netflix or Amazon. Comcast represented 4.01% of fund assets as of September 30, and Disney composed 2.78% of fund assets.

Investing in the "digital revolution"

Charlie Chai – November 14, 2018

"Businesses in all industries must use data more strategically ... or be left behind," says Charlie Chai, lead portfolio manager of Fidelity^® Select Technology Portfolio (FSPTX), explaining why the fund has been heavily invested in data-mining software firms.

Software companies, many of which are at the heart of such data mining, represented about 38% of the fund as of September 30, more than any other category, Chai notes, up from roughly 18% at the start of 2018.

The fund holds an overweighted position in cloud-computing enterprise software provider Salesforce.com as of the end of September, according to Chai. He says the company's Einstein Analytics platform provides customers with sales and marketing insights, utilizing both internal and external data sources.

Microsoft was by far the fund's largest holding at the end of September, as Chai says its Azure cloud services help customers with functions such as demand forecasting and inventory optimization.

Even HR is moving in a data-driven direction, Chai says. For this reason, the fund has overweighted Ultimate Software Group, which makes cloud-based software that helps mid-sized companies modernize benefits management, onboarding, and similar functions.

"I think these all are examples of software firms that help customers become meaningfully more efficient, and they're part of what I think is an enduring trend," Chai says.

Learn more about this manager and his fund
Charlie Chai manages Fidelity^® Select Technology Portfolio, which held securities mentioned in this article on September 30, 2018. As of the end of the third quarter, Salesforce.com represented 4.06% of fund assets; Microsoft composed 14.27% of fund assets; Ultimate Software Group represented 2.49% of fund assets.

Why "buyback fever" is gripping chip stocks

Steve Barwikowski – November 7, 2018

"I've been seeing an unprecedented volume of stock buybacks among semiconductor companies—and at well-below-market multiples," says Steve Barwikowski, portfolio manager of Fidelity^® Select Semiconductors Portfolio (FSELX).

Barwikowski has taken note of what he describes as "buyback fever" because, in his view, "it tends to be a value creator."

The latest example, Barwikowski notes, is Qualcomm, among the fund's largest holdings and an overweighted position relative to the fund's benchmark index as of September 30. In late July, the company authorized a $30 billion buyback, or about a third of its shares outstanding, after its failed acquisition of NXP Semiconductors, a sizable fund holding.

Meanwhile, NXP announced a $5 billion buyback authorization, about 15% of its shares outstanding, the same day as Qualcomm's announcement.

Barwikowski adds that in April, Broadcom made plans for a buyback of up to $12 billion, or roughly 11% of its shares. It remains effective until the end of 2019, according to Barwikowski, adding that Broadcom is the fund's second-largest holding after he added to it in July.

While Qualcomm and NXP approved buybacks after scrapping a plan to merge, in other cases, he says, buybacks allow companies to return value to shareholders after repatriating offshore cash, or to shift away from a "growth at any cost" mentality.

Learn more about this manager and his fund
Steve Barwikowski manages Fidelity^® Select Semiconductors Portfolio, which held securities mentioned in this article on September 30, 2018. As of the end of the third quarter, Qualcomm composed 7.65% of fund assets; NXP Semiconductors composed 4.94% of fund assets; Broadcom composed 9.88% of fund assets.